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Exclusive Provisions in Leases

Hinckley Allen Retail Newsletter

December 4, 2015

Noble Allen

They are often referred to as exclusive provisions, exclusive clauses, or restrictive covenants. No matter the nomenclature, most landlords can do without them for a variety of reasons. Although “exclusive clauses” and “use clauses” are sometimes used interchangeably, they do not mean the same thing. An exclusive clause in a tenant’s lease grants that tenant the “exclusive” right to sell a certain line of product in the shopping center. For example, an exclusive clause in a lease may read as follows:

“Tenant shall be the sole retailer of plus-size women’s apparel in the shopping center.”

In contrast, a use clause designates how the tenant is to operate within its premises, which does not necessarily prohibit it from selling any specific product per se. Thus, a use clause may read as follows:

“Tenant shall use the demised premises for the retail of plus-size women’s apparel and for no other purpose.”

A violation of an exclusive clause often has less to do with the actions of the landlord than with the actions of third-party tenants, who might or might not have been aware that they have encroached on the exclusive product line of another tenant. No matter how the violation occurred, the landlord will likely become liable to the infringed tenant under the lease, and the tenant’s relief for such violations may range from rent abatement for a period of time, to unilateral termination of the lease in extreme cases.

One of the most difficult tasks for the landlord in these instances is the implementation of an effective mechanism to deter or discourage innocent or not-so-innocent tenants who end up displaying and/or selling another tenant’s “exclusive” products, thereby triggering a violation. Because not all tenant exclusives are prominently advertised or attached to leases, Tenant Y might not know that Store X has an exclusive on plus-size women’s apparel. In today’s dynamic retail economy, where use clauses are often stretched beyond their intended scope by savvy and creative tenants, it is not always practical for a landlord in the shopping center to regulate the complete inventory of its tenants, in order to prevent the violation of another tenant’s exclusive. One solution is for the landlord to avoid granting exclusives to any of its tenants. After all, a heterogeneous tenant mix in the shopping center can easily be achieved if self-administered by the landlord. Certainly, there are many tenants with sufficient standing to decline to negotiate a lease unless granted the right of an exclusive. In those situations, in order to be manageable, the exclusive provisions in those leases must be limited in scope and must contain certain safeguards favoring the landlord.

Limiting the scope of exclusive clauses can also reduce the number of tenants that may otherwise have violated another tenant’s exclusive in the shopping center. Furthermore, the landlord’s task of policing renegade tenants will become somewhat more manageable, and the tenant’s status as the exclusive seller of a particular product will then become less vulnerable to infringement by other tenants.